Can Paying Private School Fees Help Mitigate Inheritance Tax?

The cost of a private education in the UK is soaring, with day fees up almost 6pc year-on-year. We look at if paying these fees can actually mitigate Inheritance Tax.

The Rising Costs of Private Education

On average, families can now expect to pay over £6,827 per term for a day school and £11,597 for boarding, according to recent data¹, with the most expensive schools charging in excess of £50,000 a year. Prices could be about to rise even further, with Labour threatening to remove the VAT exemption on fee-paying schools.

Grandparental Support for School Fees

These huge increases have left many middle-class parents unable to cover the cost without the financial support of grandparents. But the advice is that we should think twice before tapping up the bank of grandparents. Depending on who makes the transfer, and when, paying school fees could result in an unexpected inheritance tax bill.

Inheritance Tax and School Fee Transfers

No inheritance tax is due on transfers made for the education of children under the age of 18 or in full-time education. However, there are a few important things to note here. The transfers will only be considered free from inheritance tax if they were made by the parent – except in cases where the child is not in the parent’s care.

In other words, grandparents and other relatives of the child generally will not benefit from the exemption. Even if the transfer is made directly to the school, it will count as a gift and could pose an inheritance tax liability. This seemingly limits how much help parents can expect to get from other family members.

Annual Gift Allowance: A Potential Solution

However, there are ways around this. Everyone can give away £3,000 a year without paying inheritance tax on the gift. If you have never used this allowance before, then in the first year you can give away £6,000. This means grandparents could contribute up to £12,000 between them in year one, and then £6,000 for every year after that. While this will make a dent in the fees, it obviously will not cover the annual cost in full.

Gifting Large Sums for Education: Seven-Year Rule

For those who can contribute more – and want to – there are other options. You can give away sums of unlimited value without paying inheritance tax, as long as you survive the gift by seven years. Therefore, if possible, it may make sense to pay a larger lump sum towards higher education earlier, rather than cover the fees in instalments every year. Even then, whether the transfers would be subject to inheritance tax depends on how much of the £325,000 nil-rate band you have by the time you pass away, plus the size of your estate.

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Sources: Techlink  (07/07/23) and ¹SchoolFeesChecker (10/10/22)